CEO Overconfidence and Firm’s Investment Decisions: Evidence from Russia

Student: Morkovkina Evgeniya

Educational Programme: Strategic Corporate Finance (Master)

Final Grade: 8

Year of Graduation: 2016

The current study investigates the relationship between CEO overconfidence behavior and firm’s investment level taking into account the board’s monitoring and advising role. The latter is an additional one to traditional board’s functions proposed by agency theory. The paper provides empirical evidence for interaction between biased CEO and the board of directors in the framework of decision-making process on capital investments inside 88 large publicly traded Russian firms. Following procedure of construction of CEO overconfidence score the study reveals that firms under overconfident CEO tend to invest heavier. Moreover, despite monitoring functions prescribed to the board Russian directors collaborate with overconfident CEOs due to similarity in their personal characteristics, educational background and experience that lead them to the similar decisions. Thus, the board of directors loses some degree of influence on CEO’s intension to promote growth in firm’s capital investments causing the problem of “powerful managers”. Wherein, CEO’s motives for increasing firm’s investment level occur due to their own personal characteristics, education and experience, enhancing the degree of their overconfident behavior, rather than the board’s advice.

Full text (added May 15, 2016)

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